Banking and financial institutions (hereinafter referred to as ‘financial institutions’) provide loan or mortgage facilities (hereinafter referred to as ‘loan’) to people for fulfilling their various monetary needs e.g. purchase of homes, automobiles, consumer durables, etc. Such loan facilities involve a number of monetary transactions. The borrower avails the loan facilities provided by the lenders (e.g. financial institutions) and for the amount borrowed by the borrower; the lender levies a rate of interest usually on a per annum basis. The borrower pays back the borrowed amount in form of number of installments. The borrower may be an individual or an enterprise.
A loan is granted to a borrower on the basis of agreed conditions between a financial institution and the borrower such as a principle loan amount, a time duration of the loan (or loan term), an annual interest rate (or nominal rate of interest), a time period of repayment and hence the installments or payback amount. The installments are due at pre-determined payment intervals e.g. monthly installments during the tenure or term of the loan.
The existing systems and methods provide financial institutions with a rigid installment repayment schedule that usually allows a fixed number of periodic equal sized installments. The installments have to be made on a set date, for example the 15th of every month. This results in a linear repayment schedule. The problem arises when an irregular or non-linear schedule has to be developed for loan repayment with multiple installments in a period, for example 20th and 30th of each month, or 10th and 25th of each month. To be able to design a loan repayment schedule for such a case, the installment calculation has to be done manually.
Financial institutions also offer the service of incorporating unplanned partial pay-offs and advance payments into the loan schedule. In a case where there arises a need to include an unplanned or a partial pay-off, systems typically initiate a rescheduling of the loan. However, the problem arises in a case wherein a loan repayment schedule requires incorporating planned bullet payments or planned payment holidays. Further, it is generally desirable to incorporate other flexibilities such as provision for an incrementing and/or decrementing installment for predefined period(s) for incrementing and/or decrementing the installment according to the user's requirements.
Financial institutions may consider differing accrual bases to generate loan repayment schedules based on their policies and/or government regulations. Periodic installments are determined using the accrual basis. The commonly used accrual basis are US30/360, US30/Actual, US30/365, Actual/Actual, Actual/365 and Actual/360. The existing systems and methods typically employ only one of the above mentioned accrual bases for computing the loan repayment schedule. It is generally difficult to incorporate or switch over to a different accrual basis in certain situations. For example, the US30/360 basis assumes that a year of 360 days is spread over 12 months uniformly containing 30 days in each month. A system employing this basis will usually not be able to calculate installments on an Actual/Actual basis where it is assumed that a year has 365 days (and 366 for leap year). Therefore, there is a need of a method and/or system which caters to varying accrual bases as per the requirements of the user.
Existing systems and methods typically do not provide sufficient flexibility to conveniently incorporate and accommodate various user selected parameters such as bonus payments or bullet payments into the installments, e.g. when a borrower chooses to pay USD 10,000 as installment every December or the borrower opts for an annual bonus payment which is twelve times the original installment. It is difficult to provide sufficient flexibility for scheduling repayment of the loan with available systems without initiating a complete rescheduling of the loan. This may cause inconvenience to the borrower (hereinafter referred to as ‘user’) and/or the lender who wish to structure/schedule a flexible and non-linear loan repayment schedule. This strengthens the need for the present invention, for systems and methods for structuring/scheduling a loan with irregular or nonlinear and regular or linear installment payment options while catering to various accrual bases.
Generally, an investment gains build up not only on the principal amount, but also on the interest earned by compounding. Compounding is often used to describe the frequency with which financial institutions add interest onto the principal. The more often compounding happens (e.g. some banks compound daily), higher is the interest earned on the investment. The rate of interest quoted by the banks and financial institutions is known as the nominal rate of interest. The nominal rate of interest is specified generally on a per annum basis. But if interest is compounded more than once a year, the actual rate of interest paid or received, called the effective rate of interest, is higher than the nominal rate of interest. For example if a sum of USD 100 is lent at 12% per annum, then the user (borrower) is liable to pay USD 12 as interest at the end of one completed year. However, if the user pays 100*0.12/12=USD 1 each month for 12 months (as a typical equated monthly installment scheme would arrive at), then the rate earned by the lender is actually higher than what the lender would have earned if he were to get USD 12 at the end of the year. USD 1 every month is much higher in value than USD 12 in the end of the year. In practice a loan is expressed in nominal rate per annum while the actual rate charged to the borrower is as per the number of payment periods in a year. This implies that the actual rate earned by the lender becomes higher than the nominal rate. This typically results in an accumulated adjustment installment at the end of the loan tenure. It is hence desirable to consider an effective rate of interest in order to schedule more accurate installment amounts which result in zero or minimum adjustment installment at the end of the loan period. Thus there is a need of flexible methods and/or systems to overcome above mentioned and other drawbacks of the existing systems.